Americans Seize Second Chance Mortgages Post-Foreclosure

April 3 (Bloomberg) -- Jason Schmitt lost his $90,000-a-year job at an oil rig in 2009. The bank repossessed his Tulsa,
Oklahoma home and the former Army combat engineer went bankrupt.
Last month, after moving with his family to his Missouri
hometown, he got a Veterans Administration mortgage that lets
borrowers buy property just two years after a foreclosure.

“I’m not embarrassed by saying we had a bankruptcy -- it
seems that so many people have fallen victim to losing their
job,” said Schmitt, 35, now a recruiter for the Department of
Veterans Affairs. “We’ve come back from this and we are not
going to give up on homeownership.”

The Schmitts are at the vanguard of potential buyers that
were locked out of owning homes after 15 percent of U.S.
borrowers lost their properties since the start of the
foreclosure crisis. Even as banks are holding borrowers to
stricter mortgage standards, the improving job market is lifting
incomes and helping families repair credit scores, expanding the
pool of eligible buyers and providing additional firepower to
the housing recovery.

About 7 million mortgage holders have had to leave their
homes since 2007 because of foreclosure or a short sale, in
which a property is sold for less than is owed, according to
RealtyTrac. More than 1 million of them are now eligible for
mortgages backed by the Federal Housing Administration, which
requires a three-year waiting period and a minimum 3.5 percent
down payment, said Mark Zandi, chief economist for Moody’s
Analytics Inc. in Westchester, Pennsylvania.

Eligible Expanding

While many Americans will be blocked from buying because of
insufficient credit, savings and income, eligible households
will expand to nearly 2 million by the end of 2014, he said.

“This could be a significant source of housing demand
going forward,” said Zandi. “Lots of people lost jobs through
no fault of their own. They will be good credit risks in a
reasonably good economy. It was not their willingness that was
the problem, but their broad ability to pay.”

As the economy has recovered from the longest recession
since the Great Depression, Americans have lifted their credit
scores by paying off credit cards, car loans and other debts,
said Joanne Gaskin, product management director for scores at
FICO, which measures on a scale that ranges from 300 to 850 and
is crucial in determining access to credit.

More mortgage borrowers have scores of 800 or more than two
years ago and a greater number of them are rising in the 560 to
660 range, she said. The median score climbed from 711 in
October 2011 to 714 a year later.

Shrinking Supply

As more buyers are able to access credit, competition for a
shrinking supply of homes is driving up prices. The inventory of
homes for sale rose in February after dipping to a 12-year low
in the previous month.

Rising home values are also helping homeowners regain
equity, allowing more of them to refinance and providing an
incentive to stay current. Prices rose 10.2 percent in the 12
months through February, the biggest increase in seven years,
according to Irvine, California-based CoreLogic Inc. More than
1.7 million homeowners returned to positive equity in 2012 and
seriously delinquent mortgages fell to the lowest level since
2008, the Mortgage Bankers Association said on Feb. 21.

“The upward shift in FICO scores is good news for the
housing and mortgage market as there is a significant percentage
of the U.S. population that would be considered good quality
borrowers for consideration,” Gaskin said.

Easing Underwriting

While underwriting standards remain restrictive compared to
the real-estate boom, they’re easing as lenders approve loans
for borrowers with lower credit scores. The average FICO score
for conventional home purchase loans fell to 761 in February
from 764 a year earlier, said Pleasanton, California-based Ellie
Mae. Average down payments declined to 20 percent from 22
percent, according to the company, which provides software to
the mortgage industry.

Lenders may further loosen standards when a wave of
borrowers refinancing recedes and originators turn their focus
to homebuyers, said Andrew Davidson, president of Andrew
Davidson & Co, a New York-based consulting firm. The recession
hit many people who would be reliable borrowers in a better
economy, he said.

“If somebody bought a home and then lost a job and the
home fell in value and now they have a new job and want to
borrow responsibly, they are good borrowers,” Davidson said.

Jason Schmitt was fired from Baker Hughes Inc. in 2009
after a drop in oil prices and consumer spending forced the
oilfield-services provider to cull more than 3,000 positions. By
October the unemployment rate in the U.S. had risen to 10
percent, up from 4.4 percent in October 2006 before the housing
crash.

Rebuilding Credit

After failing to get any offers for their home and a second
investment property, the Schmitts let both houses to go into
foreclosure and they filed for bankruptcy. When the Department
of Veterans Affairs hired him for $25,000 a year in Missouri in
August 2009, he moved back with his wife, Megan, and two young
children to Moberly, where he grew up before joining the Army
and serving in Kuwait and Bosnia.

To rebuild his credit, the Schmitts kept to a budget,
planned meals a week in advance and gave up eating out. They got
a $500 line of credit from their bank and made minimum payments
for a year. Everything was paid on time, from utility bills to
car payments and Schmitt’s FICO score climbed to 693 after
bottoming in the low 500s a few years ago. He was promoted in
February and his salary rose to $58,000 a year.

Clean Slate

“We started with a clean slate,” said Schmitt, who bought
a $75,000 three-bedroom property they had been renting with a
mortgage from Veterans United Home Loans, a company that also
provided him with free credit counseling. “This is the American
dream -- who doesn’t want to own a home?” he said. “We want to
plant our roots. We want our kids to be able to say, ’that’s
where I grew up. And that’s my room.’”

Buyers such as the Schmitts who rebounded from a
foreclosure or short sale made about 6 percent of the $3.3
billion loans Veterans United completed last year, the company
said.

Jon Maddux co-founded AfterForeclosure.com late last year
to find loans for borrowers who have had homes repossessed.
Maddux said he’s hearing from clients of another company he
helped create in 2008 called YouWalkAway.com, which advises so-called strategic defaulters who choose to walk away from
mortgages they can afford because of declining home values.
Maddux said he’s tapping a market that many loan officers don’t
want to bother with because it’s time consuming.

Dirty Fingernails

“You have to get your fingernails dirty,” he said. “If
there’s an error on a report, you have to fix that and it takes
time.”

Glitches in the system are preventing more borrowers from
returning to the market. Fannie Mae’s automated underwriting
system is rejecting many people who should be able to qualify in
as little as two years after a short sale, said Terry Clemans,
executive director of the Chicago-based National Consumer
Reporting Association, whose members prepare credit reports used
by lenders.

Because the credit industry doesn’t have a specific code
for a short sale, lenders are forced to report them as
foreclosures, which delays borrowers from getting Fannie Mae and
Freddie Mac mortgages, Clemans said. A foreclosure disqualifies
buyers from buying with a Fannie Mae or Freddie Mac loan for up
to 7 years.

Fannie Mae on March 12 acknowledged that the automated
system can’t always accurately identify short sales because of
the coding issue and said lenders have the option of manually
underwriting the loans.

Short Sales

“It’s a very serious issue because the difference between
getting into a home after a short sale and getting into a home
after an actual foreclosure is twice as long,” Clemans said in
a telephone interview. “The system needs to be altered so that
we document short sales appropriately.”

George Albright, a 44-year-old videographer in New Port
Richey, Florida with a 720 credit score and a 20 percent down
payment, has been blocked by the underwriting systems of Fannie
Mae and Freddie Mac, according to his mortgage broker, Pam
Marron. Albright said he stopped making payments on his house in
2009 as his marriage was ending and his freelance work was
slowing. Now he said he can afford to buy the townhouse that he
rents for $1,500 a month because a work contract boosted his
income last year to twice what it was in any of the previous
nine years.

Lender Mistakes

“I bit off more than I could chew -- it was my fault and I
take full responsibility for it,” Albright said. But lenders
“made bigger mistakes on a grander scale and people like me are
not getting a second chance. They’re like, ‘We made a mistake
and are all stabilized now but we are not giving out loans.’”

Such delays can be costly for these borrowers, who see a
window of opportunity closing, said Kory Kavanewsky, branch
manager for CMG Financial in Coronado, California. About 10
percent of his clients who applied for home purchase loans last
year had short sales or foreclosures in their past.

“They are eager and anxious about getting back into the
market,” Kavanewsky said. “Even if rates go up 2 percent and
sales prices go up 10 percent, it can make it so they can’t
qualify.”

Some borrowers who don’t qualify for conventional financing
are turning to private money lenders such as Rick Piette, owner
of Las Vegas-based Premier Mortgage Lending, which gets funding
from individuals and institutional investors. Piette says he
spends about $15,000 a month on advertising his “second
chance” mortgages in the Las Vegas market and has given out
about 200 of them since June 2011.

Grown People

The mortgages, which are given to borrowers with stable
jobs and at least 20 percent to put down, have an 8.99 percent
rate for a 30-year term and 6.99 percent for 15 years. Among his
customers is a retired couple who are closing this month on a
house in Las Vegas a year after a bankruptcy and two years after
losing two Florida houses to foreclosure.

“They’re big grown people in their 70s and they don’t want
to rent,” Piette said. “They’re taking this on as a purgatory
loan and they will refinance when they can.”

Borrowers willing to wait will likely find they can access
better rates.

“Moving farther away from the point of foreclosure is
going to help a lot of customers,” Ezra Becker, vice president
of research and consulting at TransUnion, one of the three major
credit bureaus. “One of the great tenets of credit is that time
heals.”